Three-Year Cohort Default Rates - Talking Points:

Cohort default rates (CDRs) are the rates by which students who attended colleges and schools default on the repayment of their student financial aid.

Many economic, demographic, financial and institutional factors can contribute to the default of repayment of student financial aid, such as:

An individual’s personal financial means;

The terms of the loan and services provided to the borrower after the loan is made;

The economic conditions of the job market post-completion of program of study;

The degree to which the institution prepares the student to compete for job openings in his/her field;

and others.

ACICS-accredited institutions provide access to higher education for underserved students in response to national and state priorities.

Students who complete their program of study and gain employment are at lower risk of defaulting on student financial aid repayment obligations. ACICS standards require member institutions to track and report student retention and placement rates, and maintain them at acceptable levels.

Retention – ACICS requires that a minimum of 60 percent of enrolled students are retained, year to year. The overall average retention rate of ACICS-accredited institutions in 2009 was nearly 75 percent.

Placement – ACICS requires a minimum of 65 percent of graduated students be placed in a related field. The overall average placement rate for 2009 was 74.13 percent.

ACICS places emphasis on providing “best practices” for colleges and schools to enhance student retention and insure that students gain occupation in fields related to their program of study.

ACICS requires all member colleges and schools to track and provide annual reports of student retention and placement rates. Accredited institutions are also required to set and publish goals and work to continuously improve these rates through the systematic and periodic review of Institutional Effectiveness Plans.

ACICS has taken several actions to ensure that accredited institutions are aware of these issues, that they are in compliance with Council standards, and that they act responsibly to help minimize the risk that students default on their public loans. Schools that are approaching thresholds of non-compliance are required to submit Default Improvement Plans before they actually cross a threshold that would require sanctions by the Department of Education.

A recent study shows that 89% of all CDR variance is created by the economy, regardless of sector.

As the numerator is increased by moving from two years to three years, defaulters as a percentage of borrowers increases. More aggressive intervention by schools, the lenders/processors, and the government and changes in the law, such as the recently enacted Income Based Repayment Plan that allows students to pay lower repayments when they first start in their careers and other students to have their debt burdened lessened if they enter public service, have not taken full effect and will lead to lower longer term default rates.

Almost 50 percent of career college students come from the lowest economic quintile. A recent GAO report that synthesized the findings of several CDR related studies on the topic reported, “In several of the studies, two borrower characteristics closely linked to higher default rates are low family income and parents who lack a higher education degree.” A literature review commissioned by CCA and performed by Indiana University in 2008 found the same result.

If the reported rates take into account the profile of borrowers and defaulters, the cohort default rates for for-profit students differ only slightly with those of community college students (9.9 percent) and are comparable to students attending Historically Black Colleges and Universities, whose student demographics are similar to career colleges. Many community colleges refuse to participate in the Federal student lending program because of concern that high defaults will reflect badly on them or lead to loss of Title IV eligibility.

Loan forbearance was the only tool available to help borrowers cope with student loan debt. The Income Based Repayment plan, that took effect July 1 of this year, presents a far more practical approach to loan repayment and, we believe will help reduce cohort default rates. The Income Based Repayment plan allows students to pay lower amounts when they first graduate and have a lower earning capacity, with payments increasing as earnings increase.

Allowing lower tuition schools to limit borrowing would also help alleviate the cohort default rate situation. Unfortunately, students use student aid to cover other expenses not related to tuition and fees. Student aid programs are not consumer lending programs and the proceeds of the former should remain concentrated on true postsecondary expenses.